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June 20, 2002

7 Min Read
Golden parachutes for troubled companies

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Editor's note: Debbie Douglas, managing director of the Douglas Group, authored this article on exit strategies for molders in financial straits. She also wrote an eight-part series on M&A strategy that appeared in the October 2000 through May 2001 issues of IMM, and is the author of a newly published book entitled Cashing In. The Douglas Group is a private investment banking firm that represents plastics company owners in the sale and purchase of businesses.


Our firm has made its living for more than 10 years by selling companies, including a great many in plastics. We love plastics companies, and we like to help sell them for as much money as possible. This year, however, every week we hear owners who say, "Please, just get me the three-years-ago price today." If your earnings have dropped precipitously, that can be very difficult. The problem today isn't that buyers are not out there. They absolutely are. But, the hard truth is that you can't sell a company making half as much money today, for the same price you could have gotten during your golden years.

So if it is really bad and you're losing money now, what should you do? Protect yourself. Take charge and sell while you, your company, and your employees can still survive. You can do it and still come out whole.

Facing Facts
The hardest thing for the owner of any downturning company to face is that the business may not be "fixable" by existing ownership or management. It takes great courage and resolve to move decisively to sell before it's too late, but the payoff can be two to five times more in value. Business descent inevitably accelerates, like a bike running downhill without brakes. Just slowing the descent is hard. Turning and coming back to the top are extremely difficult, requiring an owner willing to invest substantial money and time to fund the changes needed.

There are a great many companies today that have been struggling for years, but are only now coming to appreciate fully their problems. In today's economy, they suddenly feel the pressure—and with great force. In a one-year period, we went from all-time highs to the most tightly wound pressure that the plastics industry has felt in almost 20 years. The cold, hard fact is that continued overseas pressure, a decade of consolidation, and depressed markets have changed the industry. It is and will continue to be more difficult to be strongly profitable.

Tighten Up
If you're tough-minded enough to face reality and move aggressively to save what you can, begin with a hard look at yourself and prescribe a healthy dose of belt tightening. You may have to stop the bleeding just long enough to sell.

Cut every cost you can to trim down to a firm, solid core. Don't mortgage your future. Realize that core assets and people will be needed for the next step up. However, resist the urge to rationalize or stall. If you have excess people, cut back. Where costs can be pared down, do it. Watch cash flow very carefully.

Punch service to an all-time high. Look for opportunities to strengthen and lengthen service connections to key customers. Build partnerships to enhance customer ties. Add services such as design assistance or finish and assembly. Stay alert to opportunities for advantage when competitors falter.

Expert Help
Without delay—now—get the process of sale started. Do not pick up the phone and open up dialog with every casual prospective buyer you can think of. Your employees will hear rumors and become afraid. Your customers will find out and begin developing backup sources. Be smart and hire professional help to sell your company. There are dozens of excellent intermediaries out there, and they are clamoring for work right now.

Be selective. Hire someone who focuses only on the purchase and sale of businesses. Your attorney or CPA may be happy to take the job, but won't have the focused experience or expertise to do it as well as a specialist. Neither do you. Check references. Look for intensity and commitment.

What will professional help cost? For a midsized or larger transaction (say, $25 million-plus), a Lehman formula is common (5 percent on the first $1 million, 4 percent on the next $1 million, then 3 percent and 2 percent to a residual 1 percent on the balance). For the smaller transaction (say, less than $10 million), broker fees are higher—perhaps 10 percent on aggregate proceeds, and the brokers actually do less of the work. Nevertheless, good representation will put money in your pocket every time.

Also, be warned: Virtually all good-quality intermediaries charge some upfront retainer. Frankly, if they work for no upfront retainer, they probably aren't very good, and you will get what you pay for. Our advice is to find an expert, seek a fee arrangement that provides the broker with the incentive for a strong success element, and check references.

Calm Lenders and Investors
Depending on how distressed your company is, you may have some critical issues looming with banks or with other lenders or investors. Communication often can alleviate enormous tension. Your bank does not want to own your assets. Your investors do not like surprises. Often a well-timed and frank discussion of your recognition of the problem and the actions that you are taking to correct it will go far in easing outside pressure.

Usually it pays to tell bankers that you are planning to sell. In most distressed situations, bankers are pleased and relieved and react supportively. They may grant you a standstill on principal payments, interest, or both. In all cases, they want to ensure that when you exit, they get paid off. Thus, if they don't have all assets pledged as collateral, they may seek to enhance their position. Your intermediary or business broker should be able to help and advise you and keep financial backers calm.

Whatever the level of proactive disclosure you choose, be scrupulously honest in all communications with lenders and investors. You will be glad to have earned their trust and cooperation in the months ahead.

The Chapters
Three or more creditors can throw a company involuntarily into bankruptcy with legal demand. Alternately, a troubled company may choose to voluntarily seek Chapter 11 status and continue to operate while it is being sold. Chapter 11 offers a distinct disadvantage in sale from a marketing view because it tells everyone that you are weak and that your company can be purchased for a low price. However, buyers love the "no strings attached" cleanliness of purchase since they are guaranteed clear title, with no exposure for liabilities relating to past operations. Also, Chapter 11 filing buys time as it freezes debt for the prospective seller and forestalls repayments until matters are resolved.

Chapter 7, on the other hand, is bankruptcy with the intent to liquidate and close operations. Under Chapter 11, you may achieve some value for ongoing customer relationships, intangibles, and goodwill, and a significant core of people may well go on to jobs with the new owner. Under Chapter 7, operations generally cease as soon as practicable, and there is seldom any potential for a goodwill element in sale.

The issues to consider when contemplating bankruptcy are complex and far beyond the scope of this article. However, if there is any possibility that sale won't result in proceeds adequate to pay off all creditors and you as owner, you need to understand and consider every alternative.

There is an old saying: "You can't really tell who's swimming naked until the tide goes out." If you think that it might be you, stop pretending. Take while the getting is good and save your company.


Contact information
Douglas Group
St. Louis, MO
Debbie Douglas
(314) 991-5150
www.douglasgroup.net
[email protected]

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